After a company reports an earnings surprise – either positive or negative – its stock price frequently moves in the same direction for weeks or even months. If fact, simply buying names at the end of each month that beat the street with their most recent results is a strategy that tends to outperform the broader index over time by a considerable margin, according to Chad McAlpine, quantitative analyst at RBC Capital Markets. At the same time, holding stocks that fail to meet earnings estimates generally leads to underperformance.
“There are a number of possible explanations for this unusual behaviour, since it clearly flies in the face of the Efficient Market Hypothesis,” the analyst told clients. “Some believe that it’s simply due to the amount of time that it takes for information to be widely disseminated, while others believe that market participants systematically under react to earnings surprises initially, only to later realize the full implications of these unexpected results.”
Revenue surprises also contribute to this movement in stocks and the duration. When a revenue beat is directionally the same as the earnings surprise, the post-earnings announcement share price movement is both higher and more persistent, Mr. McAlpine said in a recent report.
Of the first 129 companies in the S&P/TSX composite index to report, 74 have posted positive earnings surprises. Within this group, 47 had positive revenue surprises and 23 has positive expense surprises.
The Financials and Consumer Discretionary sectors have seen the highest proportion of companies with positive earnings and revenue surprises, while the average magnitude of the surprises for these sectors is also positive for both earnings and revenue. At the other end of the spectrum, Mr. McAlpine found that less than half of the constituents of the utilities sector beat the street based on either earnings or revenue. He also noted that revenue surprises are better than expense surprises in terms of share price movements.
Here are the TSX-listed names that saw both an earnings and a revenue surprise this quarter and rank at the top of RBC’s quantitative model:
Fort Chicago Energy Partners LP
Corus Entertainment Inc.
Cogeco Cable Inc.
AGF Management Ltd.
Astral Media Inc.
Industrial Alliance Insurance and Financial Services Inc.
Canadian Imperial Bank of Commerce
Emera Inc.
Laurentian Bank of Canada
BCE Inc.